Part III
Developing Projects and Programs to Deal with Problems and Opportunities
Chapter 11 Developing a Strategy to Deal with a Problem
Chapter 12 Public Private Partnerships
Chapter 13 Dealing with Risks and Uncertainties
Chapter 14 Managing Projects and Programs
Chapter 15 Toward More Sustainable Infrastructure
Carl D. Martland, May 2011
Design
Implementation
Evolution
How’s it working?
What’s the problem?
What can be done?
What should be done?
Who should do it?
Project
Management
Program
Design
:
What role for
new technologies?
Are there unexpected
problems?
What changes
are needed?
Chapters 11, 12, 13
Chapter 14
Chapter 15
Define the Problem
Chapter 11
Developing a Strategy
to Deal with a Problem
Develop Objectives
Generate Alternatives
Evaluate Alternatives
What can be done at each stage of project evaluation?
Select the Best Approach
Refine the Best Approach
Approve Project
I hope that ultimately it will prove feasible to build a sealevel canal. Such a canal would undoubtedly be best in
the end, if feasible, and I feel that one of the chief
advantages of the Panama Route is that ultimately a sealevel canal will be a possibility. But, while paying heed to
the ideal perfectibility of the scheme from an engineer’s
standpoint, remember the need of having a plan which
shall provide for the immediate building of the canal on
the safest terms and in the shortest possible time.
President Theodore Roosevelt, 1905
Define the Problem:
• Expert opinion
•Public input
• Statement of needs
Pearl River
Case Study
Develop Objectives:
• Realistic objectives
Generate Alternatives:
• Brainstorming
•Expert judgment
•Public input
Evaluate Alternatives:
•Sensitivity analysis
• Use of scenarios
Select the Best Approach
Refine the Best Approach:
• Value engineering
• Impact mitigation
Approve Project
Exporting Soybeans
from Bolivia
So. California
Edison Case
Study
Aspects of Project Evaluation Addressed in Chapter 11
Similarities between Project Design and Evaluation
• Neither can be readily quantified
• There are no simple rules or guidelines
• Both benefit from broad thinking
– What are the problems?
– What are the opportunities?
– What are the options?
• Both require intelligence, insight, creativity, and common sense
Methods
• Preparing a statement of needs and
objectives
• Generating alternatives
• Assessing alternatives and testing
assumptions
• Selecting and enhancing the best
alternative
Identifying Needs and Objectives
• Fundamental societal needs:
– Mobility
– Safe drinking water
– Safe and secure housing
– Communications
– Public
• Perceptions of needs and possible
improvements vary over time
Impetus for Change
• Dissatisfaction with the existing system
• Ideas and technologies for improving
operation and management of the
existing system
• New technologies or resources that allow new ways to satisfy needs
• Court orders requiring better service,
greater equity, or reduced
environmental impacts
Boston Harbor Clean-Up
Statement of Needs
• Statements that emphasize performance will
be superior to ones that emphasize
technologies.
• Well-conceived statements lead to many
different options:
– We need to improve the urban transportation system to ensure mobility for all residents. • Poorly-conceived statements restrict options:
– We need to build more roads to relieve congestion.
Needs vs. Desires
• “Need” depends in part upon cost.
• Just because we “want” something doesn’t
mean we “need” it.
• There is a hierarchy of needs:
– Public health
– Safety of buildings
– Relief of traffic congestion
Water Supply Needs
• The city needs more water.
• The city needs to restrict the use of water.
• The city needs to ensure that sufficient water
of appropriate quality is available to meet
personal, industrial, recreational, agricultural
and other uses.
• The city, residents, and local companies must
ensure water isn’t wasted and find long-term,
cost-effective strategies to manage supply
and demand
Objectives
• Specific statements of what is to be achieved
• Can be formulated even if disagreement
concerning needs
• Qualitative objectives are easier to formulate
• Quantitative objectives provide better targets
than qualitative objectives for improving
system performance
Qualitative vs. Quantitative Objectives: Transportation
Qualitative
• Reduce congestion
Quantitative
• Reduce congestion by 10% within 3 years as
measured by average commuting time
• Reduce congestion on interstates by 5% and
on major arterials by 20%
Qualitative vs. Quantitative Objectives: Energy
Qualitative
• Increase the use of renewable energy
resources
Quantitative
• Increase the use of renewable energy
resources by 5% per year for 10 years.
• Generate at least 20% of the region’s
electricity from renewable resources within 0
years.
Qualitative vs. Quantitative Objectives: Drinking Water
Qualitative
• Improve access to clean drinking water in
developing countries
Quantitative
• Ensure that clean drinking water is available within every village in this region within the next 5 years.
• Increase the percentage of the population with
access to clean water within 50 yards of their home
from 35% to 75% within 10 years.
Qualitative vs. Quantitative Objectives: Homelessness
Qualitative
• Reduce homelessness.
Quantitative
• Provide sufficient shelter in the city for up to
5,000 homeless people during the up-coming
winter.
• Upgrade mental health plans to ensure that
patients are no longer prematurely released
from state hospitals until they have a place to
live.
Identifying Alternatives
• Ability to investigate alternative is limited: take care in deciding what to investigate!
• Consider options that are distinctly different.
• Options may consider a “preferred”
alternative – but it might be better to reserve
judgment.
• Options should always consider the “do-
nothing” or “business as usual” option.
Pitfalls to Avoid
• The Good, the Bad and the Ugly
• Tweedle Dum and Tweedle Dee
• Overkill
Methods for Generating Alternatives
•
•
•
•
Brainstorming
Systematic identification of options
Public input
Best practices and expert opinion
Keys to Effective Brainstorming
• Provide a clear statement of problem
• Gather a group of knowledgeable, interested people
with diverse backgrounds
• Give people sufficient time to review background
information
• Choose effective facilitators to lead the discussion
• Allow everyone time to present all of their ideas
• Remember that the goal is to generate ideas, not to
debate their merits
• Rearrange, combine, condense, and refine ideas
• Allow everyone to review the summary
Two Ways to Structure
Brainstorming Groups
Skills/Interests
Role
Design
Developer
Location
Owner/Investor
Operation
Abutter
Construction Process
Government Official
Safety
Environmental Group
Economic Impact
Chamber of Commerce
Systematic Identification of Options
•
•
•
•
Adjust prices to manage demand
Improve productivity by better management
Repair or rehabilitate portions of the system
Invest:
– Improve capabilities of existing system
– Expand the system
– New types of infrastructure
Vary timing, location and staging of each option
Public Input
• Hearings
– Present needs, opportunities, and preliminary
ideas
– Seek input from the public
– Find out what is controversial while it is still
possible to adjust plans
• Work with Public Interest Groups
– Conservation groups
– Public interest legal groups
– Neighborhood organizations
Best Practices and Expert Opinion
• Best practices will be available for wellestablished infrastructure-based systems.
• Experts will be able to identify the available
options for improving an infrastructure-based
system.
• Other experts will be able to provide insight
into environmental, social or other issues that
may arise.
Tren Urbano’s San Piedras Station (San Juan Puerto Rico)
Dealing with Uncertainty
• Sensitivity analysis
• Scenario analysis
• Probabilistic analysis
"Make Uncertainty Explicit"
(Principle 6, Sullivan et al, Engineering Economy, p. 7)
Understand the uncertainties and the risks
Seek protection against the most serious risk
Use discount rates that are suitable for the
risks evident for a particular project
Higher discount rates for riskier projects
Uncertainty
We cannot predict the future, and we may
not even have good estimates of
probabilities of possible outcomes
Variations about the norm
Changes in trends
"New Facts"
Projects create new demands - and we can't
always refer to past experience
Risks
Risks refer to the possibility that something will go
wrong. For example:
Construction risks(unable to construct on time and within budget because of technical or organizational problems)
Competitive risks (loss of market to better,earlier, or
larger projects similar to or substituting for your project)
Financial risks (changes in interest rates ,exchange
rates, credit limits that affect our ability to raise sufficient
funds for project; changes in cash flows that affect ability
to mortgage payment)
Political risks (changes in government or in regulations
that limit our ability to complete, open, or receive
payment for our project)
Methods
• Methods driven by the analysis
– Sensitivity Analysis
– Probabilistic Analysis
– Monte Carlo Simulation
• Methods driven by the structure
– Key drivers
– Scenarios
Sensitivity Analysis
Systematic analysis of the effects of changes in one
or more variable on our results and our choice of an
alternative
Cost factors: unit costs, discount rates, process speed
Benefit factors: prices, demand, external impacts
Key choices
What is our base case?
Best estimate of all factors
What factors to vary? by how much?
Those with the greatest uncertainty and those related
to known risks
Vary over likely range of options
Sensitivity Analysis: “Spiderplot”
($2 billion building with NPV of $800 Million)
1600
1400
1200
1000
Rents
Const. Cost
Loan Rate
800
600
400
200
0
-30% -20% -10%
Base
10%
20%
30%
Sensitivity Analysis: Using a More Realistic Range for Varying a Single Factor
($2 billion building with NPV of $800 Million)
NPV of Project 1200
1000
800
Loan rate
Base NPV
600
400
200
0
4% 5% 6% 7% 8% 9% 10% 11% 12%
Interest Rate on Mortgage
Probabilistic Analysis
• Treat the key factors as random
variables (continuous or discrete)
• Develop expressions for key
performance measures as functions of
the random variables
• Calculate the probability that the results
of the project will be unacceptable
Probabilistic Analysis: Difficulties
• We generally don’t know the
probabilities
• The math gets complicated very quickly
• The design process is more related to “possibilities” than to “probabilities”
Scenarios
A "scenario" is a set of internally consistent
assumptions that together provide a vision of a
"possible" future within which our project will be
implemented
Broader than sensitvity analysis
For example: Optimistic/Most Likely/Pessimistic
Elements of a Scenario - the factors that we believe
are important to our project that we wil vary across
scenarios. For example:
General economic conditions
Response of competitors to our project
Construction prices
Steps for Developing Scenarios
Peter Schwartz, “Art of the Long View”
•
•
•
•
•
•
•
•
Identify the focal issue or decision
Identify key local forces
Identify key external forces
Rank by importance and uncertainty
Select scenarios defined by drivers
Flesh out the scenarios
Implications
Identify and monitor leading indicators
Creating and Using Scenarios
(“Mobasheri, Orren, and Sioshansi, “Scenario Planning at Southern California Edison”, Interfaces 19: Sept-Oct 1989, pp. 31-34)
• “Futility of plans based upon rigid forecasts”
• “Focuses on what might happen, or can go wrong, and
how to deal with it”
• Developed 45 scenarios in12 clusters related to
demand for peak power: “representative of all plausible
scenarios that might be constructed”
• Address strategic concerns for each scenario
• Seek strategies to “eliminate or mitigate the
consequences of bad outcomes”
• “No attempt to assess probabilities”
Probabilistic Risk Assessment
Problem: how to deal with risks related to natural disasters or unusual events (earthquakes, fires,
accidents)
Assess Risk = PROB x CON
PROB = Probability of event
CON = Expected consequences of event
Assess cost ΔC of reducing risks
Compare incremental cost to incremental risk
If ΔC < reduction in risk, then it is worth adding the extra
cost
There may be many effective ways of reducing risks
Probabilistic Risk Assessment: Reducing Highway Risks
• Reduce probability of accidents
–
–
–
–
–
Licensing requirements
Enforcement (speed, drunk driving, etc)
Highway geometry
Highway maintenance
Free coffee at rest stops
• Reduce severity of accidents
– Seatbelts
– Automobile construction
– Roadside barriers & removal of obstacles
Probabilistic Risk Assessment: Reducing Risks of Flooding
• Probability of floods
– Hydrological records (100-year flood)
• Consequences of floods
– Historical records (damage & fatalities associated
with N-year floods)
– Predictions of future damages
• Options
– Dams & levees
– Limit development in flood plain
– Build to withstand floods
Probabilistic Risk Assessment: Evaluating Flood Control Projects
• Estimate costs of options
– Convert to equivalent future annual cost
• Estimate expected costs of floods, for each
option
– Convert consequences of N-year floods into
expected consequences per year
• Compare reduction in annual consequences
to equivalent annual cost of project
Protection Against Project Risks
Failure to meet budget & time table
Studies, site surveys
Penalty clauses in subcontracts
"Cost Plus" rather than "Fixed Price" contract
Failure to meet revenue targets
Studies and surveys
Pricing & staging options
Natural disaster; construction accidents
Insurance
Safety plan - WHEN to work; HOW to work
Bankruptcy
Minimal leveraging; loan guarantees
Government interference
Partnerships with government or local firms
Risks Are Shared Among the Actors Involved in a Project
Are MY risks commensurate with MY
potential benefits
Can I include sufficient time in the work
schedule to cover the expected range of
delays and a sufficient amount in my budget
to cover the expected range of cost
variation?
Can I get insurance to limit my liability for the
worst things that might occur?
Can I negotiate a better deal?
Bidding on a Project:
Include a "Margin of Error"
25
20
15
10
5
Cover with Insurance
30
Exp. Cost + Fee
Exp. Cost
35
0
80
84
82
88
86
92
90
98
96
102 106 110 114 118 122 126 130
100 104 108 112 116 120 124 128
Staging
Break the project into several stages that can be
implemented if and when demand warrants
May lead to higher construction consts for the project if
all stages are eventually build
Added flexibility reduces risks that insufficient demand
will lead to financial problems
Examples
Build one tower where there is room for two
Buy options for additional land
Build a house, but don't finish the basement or the attic
Case Study : Bridging the Pearl River Delta
• The Pearl River bisects one of the most densely populated areas of the world
–
–
–
–
Guangshou (15 million people)
Hong Kong
Macau Several other cities with >1 million people
• Various proposals for bridges or tunnels to link Hong Kong with western side of delta
Case Study : Bridging the Pearl River Delta
• Hong Kong 2022 Foundation
– What issues should be considered?
– What constraints must be recognized?
• Interdisciplinary team:
– US and Chinese experts
– Urban planners, transportation planners,
and people with extensive government
experience in implementing large projects
Key Issues
• Feasibility of construction
• Need for bridge (feasibility of financing)
• Location of bridge
• Role of bridge as key link in multi
centric region
• “More than a bridge”: what are the
related opportunities?
Bridge or Tunnel
Length
Cost
Chunnel (rail tunnel connecting
50 km $21 billion
Great Britain and France)
Lake Pontchartrain Causeway
$0.06
39
(connecting New Orleans to
billion
points north of the city)
Chesapeake Bay Bridge/Tunnel
$0.4
28
(connecting Norfolk VA with
billion
the Eastern Shore of VA)
Oresund (Denmark – Sweden)_
$2.4
16
billion
Tokyo Bay Aqualine (connecting
$11.7
Tokyo with the relatively
15
billion
undeveloped eastern side of
Tokyo Bay)
Toll
$75
$1.50
$10
$32
$20
“More than a Bridge!”
Lessons from the Pearl River Delta Study
• There is not time study all of the issues that are
raised at the early stages of a project.
• The private sector may recognize the feasibility of a
project and push for an early start. But:
– Will they build the best project?
– Will they consider the related issues, e.g. traffic
management in the region or economic linkages across
the delta?
– Will they maximize their profits rather than overal socio
economic benefits for the region?
• An interdisciplinary team can indeed help to clarify issues and identify a broader set of alternatives.
MIT OpenCourseWare
http://ocw.mit.edu
1.011 Project Evaluation
Spring 2011
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